Wait-and-see tactic for Australian Reserve Bank

Governor Glenn Stevens has more scope to cut rates in the coming months. Photo / AP

Australia's central bank kept its benchmark interest rate unchanged to gauge whether the lowest borrowing costs in 49 years and government spending will pull the economy out of its first recession in two decades.

Governor Glenn Stevens left the overnight cash rate target at 3 per cent in Sydney yesterday after cutting it by a quarter point last month, the sixth reduction in eight months.

While Australia's economy is shrinking amid a slump in global demand for exports and weaker consumer spending, Stevens said yesterday that government spending, lower borrowing costs and a pick-up in China will drive a rebound. Stevens has more scope to cut rates in coming months to spur an economy he expects will recover later this year.

Yesterday's statement "hints at a wait-and-watch stance," said Su-Lin Ong, senior economist at RBC Capital Markets. "It's clear we're getting closer to the end of this easing cycle."

The Australian dollar rose to US74.08c in Sydney from US73.91c before the decision was announced and US74c in New York yesterday. The two-year government bond yield gained 3 basis points to 3.33 per cent. A basis point is 0.01 percentage point.

"The stance of monetary policy, together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead," Stevens said.

In deciding whether future rate cuts are needed, policy makers will "monitor how economic and financial conditions unfold, and how they impinge on prospects for a substantial recovery in economic activity", he added.

Stevens and his board have reduced the benchmark rate by a record 4.25 percentage points since early September as companies including Qantas and BHP Billiton fire workers to offset waning demand for travel and raw materials.

With demand for workers weakening, wages will rise at a slower pace, helping "inflation to continue to abate," Stevens said yesterday.

Australia's jobless rate probably rose to 5.9 per cent in April, the highest level in almost six years. The employment report will be released tomorrow. Unemployment rose by the most in 18 years in March, climbing to 5.7 per cent from 5.2 per cent.

The full effect on the economy of interest-rate cuts and almost A$90 billion ($67 billion) in government spending on grants, infrastructure and bond-market assistance since October are "yet to be observed," Stevens said.

Prime Minister Kevin Rudd signalled on April 21 that further stimulus will be provided in the Government's May 12 Budget.

Australia's gross domestic product declined 0.5 per cent in the fourth quarter from the previous three months, a report showed on March 4.

By contrast, the US and UK economies both shrank 1.6 per cent.

Japan contracted 3.2 per cent.

Recent reports support Stevens' view that lower borrowing costs and government spending are reviving the economy. Home-loan approvals rose for a fifth month in February and consumer confidence jumped in April by the most since August. Business sentiment gained in March for a second month.

"Monetary policy has been eased significantly," Stevens said, and market and mortgage rates "are at very low levels by historical standards, and business loan rates are below average, reducing debt-servicing burdens considerably."

Households with an average-sized mortgage of A$250,000 are paying A$7000 a year less than they were six months ago, which is equal to 8 per cent of average family incomes, according to the Reserve Bank.

Stevens said that while the near-term outlook for the global economy "remains weak," there are further signs of stabilisation in several countries.

"The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little," he said.

China is Australia's largest trade partner.

- BLOOMBERG